Facebook Jumps On Strong Results

Facebook‘s stock jumped in the after-hours trading on strong fourth quarter results. The company surprised the investor community by posting 76% growth in ad revenues which resulted primarily from the increase in effective ad pricing. The broader theme remained the same as the mobile platform continued to gain traction among marketers and advertisers. The success of feed based ads is drawing more customers to the platform. We had previously stated that the sequential growth in ad revenues, in tandem with the increase in ad pricing, will give us more insight on whether the company’s ad monetization is nearing a ceiling. As it turns out, we expect the growth to remain healthy in the near term as the user sentiment has remained stable or positive, despite an increase in the number of ads. As GoogleGoogle’s own social networking platform still hasn’t made a dent in Facebook’s growth, the near term risk comes from the impact of Facebook’s expansion in emerging markets on its topline growth. This year’s free cash flow may be under slight pressure as the company plans to step up its capital expenditures.

Facebook’s revenues jumped 63% in the fourth quarter of 2013, which was higher than our expectations and was driven by a record growth in mobile ad revenues. This was the first quarter where mobile not only accounted for more than half of the company’s overall ad sales (53% to be precise), but also crossed $1 billion mark. Mobile ad revenues were up by 309% over the fourth quarter of 2012, and grew by 42% sequentially. This can be attributed to an increase in the number of ad impressions on mobile platform resulting from ramp up of feed based ads, and year-over-year growth of 92% in the ad pricing. Although the overall ad impressions declined by 8%, due to users shifting to mobile platform, its impact on the revenue growth was negligible due aforementioned price increase.

Facebook is focusing on developing features and tools that will enable it to track user data better, and improve the efficacy of its advertisements. It is also working on simplifying ads and continues to market data substantiating the high return on investment that many of its advertising clients are getting. This is why the company is able to command much higher ad pricing than it did a year before, and why Q4 results beat expectations.

Is This Growth Sustainable?

The user sentiment around ad density has remained stable despite an increase in the number of ads in data feed. This suggests that there may still be a small room for increasing this density which will continue to aid Facebook’s growth in the near term. However, this will only be a small part of the growth and most of it is likely to come from ad pricing increases and growing user engagement, which is where Facebook is focusing. As far as the ad pricing is concerned, the 92% increase observed in the fourth quarter suggests that the growth is likely to come down significantly in 2014. The user base growth has slowed down too, as Facebook expands in geographies with relatively low Internet penetration. Overall, while we believe Facebook will witness healthy growth this year, the trajectory will moderate significantly.

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